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Weatherize Retirement


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Your retirement journey could be as long as one-third of your life and it will be the largest purchase you’ll ever make; therefore, you must take it seriously because your lifestyle, and that of your loved ones, depend on the decisions you make about your money.  Look at any 401(k) and you’ll see only market options.  Most employer-sponsored retirement plans aren’t retirement plans at all, they’re “investment accounts”.

Creating a lifetime income with a portion of your assets will help ensure you don’t outlive your assets. Running out of money should be an equal concern with stock markets or the economy.  Many consider the stock market or the economy the risk they fear most during retirement.

Stocks are the “growth engine.” But you have to balance stocks’ higher growth potential against the risk of a “destructive storm” because the stock market has historically taken dives of as much as 40%, 50% and even 90% during bear markets.

Often my responses is where not to invest and paint the investing environment. CDs pay next to nothing. US Treasury bonds pay a smidgen over nothing and would require you to invest out 10 years before you can hope to get a rate as “high” as 1.5%.

Stocks are always a barrel of monkeys, but if you’re investing in stocks you have to embrace – as in accept, unconditionally love – the fact that if you are starting out a 30 year retirement, recessions will happen every 5 years and bear markets (a decline of 20% or more in the stock market) happen every 3 years.

In the longer run stock values generally track corporate earnings with consistently profitable and growing companies going up in value and unprofitable or shrinking companies going down. Since few, if any, of these underlying drivers of values are known, the stock market is inherently risky. You can double your money if you guess right or lose it all if you guess wrong.  No investor can have it all – limited risk, limited downside, unlimited upside, and perfect knowledge of when markets have reached cyclical highs and lows.

The current economic backdrop is: the lowest interest rates in a generation, Interest rates have been at record lows for a while. Actually, they are near zero and have nowhere to go but up, volatile and uncertain markets for equities & bonds, political gridlock preventing economic solutions, an unstable global banking industry and emerging economies challenging America’s dominance.

Companies that have headquarters in the United States but bring in much of their revenue from abroad are facing a predicament: The appreciation in the dollar (and the flip side, a depreciation of most foreign currencies) means that their sales overseas are not worth as much as they used to be.

The combination of a stronger dollar and lower oil price — with resulting lower investment in oil exploration — may already be affecting the overall economic results. In effect, the big question as lower oil prices spread through the economy in 2015 is which force will prove more powerful — the benefits to consumers and businesses that use petroleum products, or the lower oil exploration activity likely to result. Most economists are betting on the former.

U.S. stocks fell sharply Tuesday as a drop in durable goods orders and disappointing results from Caterpillar to Microsoft heightened concern about the economy’s strength.  Everybody is aware of weakness in crude oil, but you’re seeing spillover into large, industrial companies like Caterpillar and that may be giving people pause.  And certainly Microsoft is a bellwether of the tech industry, and that’s another cause that’s having people pulling back.

Contrary to what you read and hear from Wall Street and other financial pundits, when it comes to predicting the future direction of markets remember that no one knows because there are simply too many imponderables.

So as a retirement-minded saver what should you do? First, don’t bet the farm on the market. If the market has appeal to you, then limit your exposure to what you feel can be lost without destroying the retirement that you’ve planned. You cannot place your trust in the U.S. stock market to retire you and guarantee that you will not run out of money. What if you did run out of money because you made the wrong judgment call and the market did not perform as you expected? What would you do then?

Second, lock up an income you cannot outlive and if you have any money left you can then speculate in the market. You can protect your retirement lifestyle with income that provides for your core expenses as well as life’s extras through many different financial products. Guaranteed sources of income can relieve some of the stress and worries that come with income planning for retirement spending goals.

Lifetime monthly income is more desired by baby boomers than wealth accumulation is. Today’s retirees face many different challenges than retirees off the past. Guaranteed income from a pension is almost extinct! For most, Social Security is the only form of fixed income, but alone isn’t enough to meet living expenses. Retirees are forced to find alternative forms of guaranteed income.

You have to make financial decisions today that are responsible and that will carry you forward the next 30 or so years of retirement.  You have to be prepared to weather the storm! If the storm is hunkering down on you and you fail to ‘weatherize’ your portfolio, then you could lose everything you’ve worked years to accumulate.

Finally we have the Fixed/Fixed Indexed Annuity. There is a hybrid product called a ‘Fixed Indexed Annuity’. With this, you can opt to ‘link’ to a stock market index, typically the S&P 500. If you link your performance to a stock market index, you might do better than the rate the company is declaring. But the index could also go down. But with these products, you will not lose value or any previous year gains if the stock market goes down. Those previous gains are locked in and ‘ratchet’ up.

The downside is you will not get the full up ride of the market…typically you’re ‘capped’ on your interest gain and there are different ‘crediting methods’ which allow you to perform differently depending on the volatility of the market. For example, you may choose a crediting method whereby the ‘cap’ is 6%. So if the market goes up 10%, you’ll end up with 6%. But you’ll never lose that gain in a down market. The worst you could do in a given year is ‘zero percent gain’.

Another false downside that I hear from the media about annuities is that you ‘tie up your money’ when you buy one. This is just not true. With the Fixed or Fixed Indexed annuity, you can take 10% per year…each and every year…without any penalty at all. If you take 10% per year out of any account…you’ll be out of money before you die…pretty much guaranteed! So 10% is plenty of access to money.

Also, you don’t put all your money in an annuity…just the serious money you want to guarantee will be there to generate a lifetime income to you or that you want safety and principal protection on. With the ‘lifetime income rider’, even if the annuity runs to ‘zero’ balance, you’ll still get the same income stream for the rest of your life as when you started. If properly structured, these can also be setup to allow a spouse to takeover the income stream when you die.

These products are NOT registered securities and are NOT sold by prospectus. It’s just like buying a bank account that could tie its interest rate to a stock market index’s performance.

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Tuesday, January 27th, 2015 Wealth Management Comments Off

Retirement Foundation Tool

The foundation of a retirement plan is a budget. On one side of the ledger: How much will come from Social Security, pensions and savings? On the other: How much will be spent? That budget should be revisited frequently.  It seems intuitive that since we’re living longer, your retirement might last 20 or 30 years, as such, we need more money to last us over those years.  If you then also account for future advances in medicine, and the fact that about half will outlive the average, you’re left with a very large group of people living well into their 90s.

Despite retirees in US having one of the biggest pools of private retirement savings, retirees are among the most fearful they’ll outlive their nest eggs.  Most employer-sponsored retirement plans (401k, 403b, IRAs) aren’t retirement plans at all, they’re “investment accounts”.

So as a retirement-minded saver what should you do? First, don’t bet the farm on the market. If the market has appeal to you, then limit your exposure to what you feel can be lost without destroying the retirement that you’ve planned. Second, lock up an income you cannot outlive and if you have any money left you can then speculate in the market.

So for most people, it’s near impossible to figure out with any accuracy how quickly they should draw down their savings.  The 4%rule states that you take out 4% of your savings in your first year of retirement and adjust that figure for inflation every year thereafter. The goal for many in retirement is to organize investments in such a way that they generate income of roughly 4 percent per year and still gain in value overall to keep pace with inflation.

The thinking behind this strategy is easy to understand: If you take out 4% of your savings, but the remainder of your nest egg is able to grow by a little more than 4%, then your nest egg should last indefinitely.  However, these simulations assume that you’ll make absolutely no adjustments to your spending habits as time goes on.  For example, in the past 15 years includes two major stock market crashes.  The stock market is too risky for those near retirement who cannot afford to retire if the market declines.

Even before retirement, investors should shift to an investment portfolio that matches both income needs and the means to weather inevitable market declines.  Retirees should be nudged into using some of their investments to hedge against the risk of living to a ripe old age, and running out of private savings. Most retirees would be better off if their money was invested in a way that dealt specifically with “longevity risk.”

In the face of these straightforward approaches to managing money to provide income, there are annuities.  Many Retirees have largely steered clear of using annuities, financial products that guarantee a set income for as long as you live. Don’t go into retirement without a fully equipped retirement toolbox.  Among those tools: a realistic budget paired with an efficient plan for withdrawing money from savings.

The pursuit of lifetime income options in retirement plans will go a long way toward helping Americans prepare for their income needs in retirement. But it is merely a piece of the retirement security puzzle.  To squeeze maximum income out of your savings, often the best strategy is to buy a lifetime-income annuity. Annuity retirement plans help enhance retirement security at a time in Americans’ lives when most are vulnerable to outliving their financial assets or facing reduced standards of living.

To get to larger payouts, you have to climb a wall of risk. Historically, when market conditions turn sour, alternative assets lose more money, sometimes a lot more, than traditional fixed-income investments. If you’re retired, that means you’ll still probably have to rely on principal and capital gains to fund at least some of your living expenses.

An annuity is an insurance product that can be designed to pay out income over a specified period of time. Insurance companies issue fixed annuities, which can be turned into guaranteed lifetime incomes. You can accumulate your retirement money in an annuity over time, or you can fund the annuity lump-sum.  It’s similar to a company’s pension plan, but the difference is that you, not an employer, whose contribution makes those lifelong, valuable payments possible.

Fixed annuities are backed by the assets of the insurance company, guaranteed to give you a positive rate of return which is free of income taxes until the earnings are withdrawn, and offer you numerous other choices.

At the date you select, you can turn your annuity into a lifetime of monthly checks you cannot outlive. The insurance company guarantees you a lifetime of income, regardless of how long you live. You can later change your mind, stop the income and take your money lump-sum. If you die prematurely, your heirs are paid the balance of your account.

Fixed Indexed Annuities offer several distinct advantages over stocks and bonds, including protection from market declines, elimination of bond default risk, participation in positive performance of stock market indexes, tax deferral in non-retirement accounts, sustainable lifetime income with a MGWB or income rider, investment management simplification, and elimination of investment management fees on the portion of a managed portfolio that’s invested in indexed annuities.

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Monday, January 26th, 2015 Wealth Management Comments Off

Flight to Safety in Retirement

In wealth management and retirement investing, as in life, risk and opportunity go hand-in-hand. Stock market losses can seriously reduce one’s retirement savings.” That, and then some. Suffice to say, as with the other risks, it’s impossible to predict what will happen to stocks.

When you hear the word risk, the danger that usually springs to mind is market risk. That’s the scenario in which you’ve amassed a healthy portfolio of stocks and bonds only to see it plummet in value because of a market crash or other disruption to the global financial system.

In finance, a market crash is considered a systemic risk, or risk beyond investors’ control. Although they cannot be prevented, they do provide warning signs. Concerns now lie in the fact that once again, markets are at all-time high with exuberance among investors and many ignoring the possibility of a crash.

Think of market risk as a parallel to the water level in a bathtub (i.e. the higher the water level the higher the risk). If you’re playing with your toy boat (i.e. your stocks) in that bathtub, and the valuation and risks are too high and the market corrects, then the water level will go down and will take your toy boat with it.

The opposite is also true if valuation and risks are too low. Then as the water rises, your boat will rise too. And when the market is volatile, as it is currently, we all get a little seasick.  When I hear about high yielding investments I always do a double take. Something high yield generally means something high risk…The risk vs. potential rewards suggests that stocks and diversified stock funds are no longer the best investment options.

It has been 7 years since the financial crisis of 2008 gripped the world, although it still makes the news on a regular basis. However, the US stock market has been up for six consecutive calendar years — from 2009 to 2014. If it closes up in 2015 for the seventh year in a row, it’ll be the first time this happens ever.

After 6 years of solid gains, this is now the 2nd oldest bull market in history. However, Bull markets don’t last forever  The last time stocks closed up six years in a row was over 100 years ago — back in 1893 to 1903. And then the next year saw an 18% downwards price correction.

Forecasting the weather has many similarities to investing in the stock market. How many times has the weather changed and the forecast wasn’t even close?  The key factor is that you want your investing to be better than the weatherman. You want to develop proven strategies that are going to give you best return for your own personal goals and desires.

We assume that the S&P 500 will finish the year slightly down as the strengthening of the US dollar and the new tightening cycle offset the strong US GDP growth already priced-in at the start of the year. Most economic recoveries falter in a monetary climate of rising rates, tightening credit and/or a falling dollar.

Beyond interest rates, the bull is being pushed and pulled, sometimes simultaneously, by a variety of other developments. Many of the dynamics driving stocks today can be characterized as double-edged swords, so investors must take care to be on the right side.

Whether we finish the year still in a bull market is up for debate.  Bull markets don’t always age gracefully. This one may be entering its golden years beset by uncertainties and buffeted by crosscurrents. Toward the end of 2014, a long period of calm gave way to increasing volatility, and you can expect more of the same in 2015 as the sedative of an ultra-easy monetary policy finally starts to wear off.

The Federal Reserve Board’s bond-buying program has ended, and the central bank will likely raise short-term interest rates in the second half of 2015. The surprise might be that the hikes turn out to be benign for both the stock market and the bond market, if, as we expect.  Moreover, even with the Fed pushing short-term rates higher, any increase in long-term rates will be subdued by expectations for low inflation and high demand for the safety of U.S. assets.

Historically, when the stock market tanks investors flock to bonds, which sends bond prices higher. Many investors see bonds and bond funds as their best safe investment options.  The problem here is that bonds and bond fund prices are near record highs as interest rates remain historically and ridiculously low. The problem: when rates climb significantly bonds and bond funds fall in price and investors LOSE money.

The U.S. will profit from flight to safety” as investors flee other markets for America’s.  We’ve seen this movie before, we know how it ends, and it’s not pretty,” But I say that it has longer to run, and we have already paid the price of admission. So we might as well stay to the end. You just keep your eyes on the exit door.”

No matter what you invest in, your goal should be to find safe, sound, secure solutions for your money.  Remember the story of the road. There was a fork in the road and a decision had to be made by the traveler. The first traveler picked the road most traveled and did not fare well. The next traveler met one who knew the road and picked the one least travelled and that made all the difference.

One of the most important choices facing a retiree is how to replace the monthly income that once came in with a steady paycheck. Retirees still need to pay their electric bills and phone bills; they still need cash to purchase food and entertainment.

But with no paycheck, and insufficient income from a pension or Social Security (if any such income at all), retirees often need to supplement their regular income. Ordinarily, one would invest any nest egg, from a 401(k) or other savings, in an investment product that provides an income stream.

Indexed annuities are basically an option of investment that is offered by insurance companies. They actually provide you with the benefit of investing in the stock market without the associated risks of losing your money.

So, in an indexed annuity, your principal is never lost and even in a worst case you may take some interest back home. Most insurance companies offer a minimum guaranteed rate of return on index annuities which makes it worthwhile when the market conditions are poor.   And they will not lose money in a down market.

The indexed annuities are therefore seen as a conservative and prudent investment.  They became quite popular during the previous bullish run in the market and insurance companies saw them as an excellent means of combining the security of a guaranteed return with the boom of the stock market.

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Friday, January 23rd, 2015 Wealth Management Comments Off

Alternative Retirement Plan

Over the last four decades, the 401(k) plan has replaced the pension as the main form of retirement plan.  That means many Americans are now managing investments on which their financial well-being depends—and doing it in their spare time.

Making investment in the stock market is the riskiest thing you can do with your hard earned money. On the other hand it is one of the most profitable one also. So, it’s natural for you to have reservations on dabbling in the stock markets.

Stocks notched dozens of records highs in 2014 as the Dow Jones Industrial Average gained 7.5% and the S&P 500 climbed 11.4%. But many Americans didn’t share in the gains. Only 54% of American adults owned stock last year.

Putting money in a well managed stock based mutual fund in an employer sponsored 401(k) plan is about as close to a “sure thing” that one can get – provided that history keeps repeating itself and there is enough time for that investment to grow.  However, you can’t just invest and forget. You need to make sure your 401(k) plan is reasonably acceptable (low or no fees, company matching contributions, acceptable mutual fund offerings, etc).

The mutual fund industry pours a lot of time and money into making sure you hear the message, “Your investments are safe with us.” Stealing your principal is illegal. Stealing a huge share of your increase is not. You have to know how the mutual fund industry is making you poorer.

Why aren’t fund investors getting better results? For starters, fees and expenses eat into the returns. For U.S. mutual funds, the average expense ratio is 1.23%.  Every time you trade a security, every time you buy a stock or sell a stock, you’re paying a commission or some kind of sales cost. Those costs are going to eat away your returns over time.

There are all types of fees related to 401(k) accounts including management and administrative fees, trading costs and record-keeping fees.  To counteract the impact of the median fees plus inflation, an IRA owner would have to earn “more than 7.3%” a year.

Over the past 30 years, the stocks in the S&P 500 index have produced a total return of 11.1% annually, according to research company Dalbar. But the average investor in U.S. stock funds earned only 3.69% annually over the same period.

It is easy to lose money in the stock market when it goes down! Why? Stocks fall 3 to 4 times faster than they rise. So you are likely to lose a lot faster, and as such get trigger shy into to thinking it will come back when you should have sold. And because we coax ourselves into thinking “we are in it for the long term,” we freeze up and let it happen.

But here’s the rub, you don’t have to be invested in the stock market 100% of the time to be “in it for the long term.” We just have to know when to get into the market and when to sell.  The bottom line is that no one really knows what the stock market is going to do during the next ten years.

Fear is a factor for many investors who have suffered through two stock-market crashes since 2000.  Given the uncertainty of the market, why would anyone invest in stocks anytime soon?  Investing in the stock market is akin to gambling.

They hear news reports of spectacular gains in a stock or the overall stock market and then, a few short weeks or months later, they hear the new report just as spectacular losses. To them, these reports paint a picture of market increases, then decrease, then increase again in what appears to be an unpredictable, random pattern.

U.S. investors have been spooked by a collapse in commodities and may not be sure whether that’s a signal to buy or sell.  Next week may show whether U.S. stocks are finally undergoing a long-awaited correction or if recent run of losses are just a bump on the road to more gains.

Financial media, social media and online forums make it easy for investors to share portfolio ideas. Many researchers believe such transparency contributes to a herd mentality in investing.  The problem: Herd investing can lead to poor returns. “You have situations where the blind are leading the blind.

The key to investing your dollars properly comes down to who YOU are and what YOU know.

Let me explain by using an example. If I approached you with an opportunity and I explained it in the following manner, how would you feel?

“Mr. & Mrs. Jones, I have an investment for you that is really good because everyone else is doing it. There is no guarantee that it will go up, but if you wait long enough it’s likely to have increased at least a little just due to inflation, so that helps (and if you lose money, so does everyone else, so it’s not as bad).

Also, you won’t have control of your money, but someone, whom you’ve never met will be handling it. This person who is controlling your money doesn’t really know what you are trying to accomplish, and if he/she does a bad job with your money they don’t have to answer to you.

You probably won’t understand the investment because it is very complicated and you don’t need to know where your money is being invested because that takes a lot of time and training.

Lastly, you have to leave your money in the investment, even if it starts to go haywire, until you are ready to retire or else there is a penalty.”

How would you feel about that investment?

Speculation in these markets requires that one accept losses as part of the game. In other words, while the risk of loss can be minimized through intelligent allocation of the money over different types of assets, the probability of loss of value at some point in the investment cannot be avoided.

Having an understanding of the risk you’re taking when you put your money in the investment markets is essential to being an investor. The blunt truth of it is if you want to sell or get upset when your accounts are down, then you shouldn’t be invested so aggressively.

In today’s unstable market, many investors are scrambling to find alternative investments to the stock market and their 401k plans.  Where does a person invest their retirement money?  One alternative option is called a Fixed Index Annuity.

Fixed Index Annuities are long-term investment programs offered through insurance companies where one can invest his money and guarantee the principal. Interest is then credited to the account based on the performance of a stock market index (such as the S&P 500). If the index goes up in a particular year, then the account is credited a portion of the gain up to a certain “cap” (a ceiling or limit).

If the index goes down, then the account loses zero – nothing. The tradeoff is that you will give up some of the upside in exchange for no losses. This is certainly not a panacea, but it does have application in the appropriate circumstances.

 

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Monday, January 19th, 2015 Wealth Management Comments Off

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